Kenanga Investment Corporation Ltd Research Report as at 10th January 2013
LLUB Equity Research report
1
Market Price:
Prepared by Dananjaya Wijesekara & Rasheed Sheriff
LKR 212
CHEVRON LUBRICANTS LANKA PLC (LLUB)
Long Term Buy
Price Target:
Sri Lankan Lubricant market Overview
LKR 245
 Lubricants became a private monopoly in the mid 1990s after Ceylon Petroleum
Corporation privatized its Lubricants to Caltex, which is now part of the Chevron
Petroleum Group.
 South Asia consumes an estimated 1,700 kilo tonnes of lubricants per year.
India is the leading lubricant-consuming country in the subcontinent by far,
accounting for an estimated 75% of the volume consumed, followed by Pakistan
and Sri Lanka
 At Present the Public Utilities Commission of Sri Lanka (PUSL) is acting as the
shadow regulator for the lubricant sector by way of advising and assisting the
ministry of Petroleum Industries on policy and regulatory matters.
 As at the end of year 2011, there were fourteen entities authorized to import,
export, sell, supply and distribute lubricants.
 The local lube market is currently estimated at about LKR 6 Billion in terms of
Revenue.
 The two authorised parties to blend and produce lubricants in Sri Lanka are
LLUB and Lanka IOC PLC.
 During the year 2011, around 64% (33,440 KL) of the lubricant requirement was
produced (Blended) locally.
 Around 87% of the blending was carried out at the lube blending plant of
LLUB while the balance 13% was produced by the lube blending plant belonging
to IOC. Local blending is mainly carried out in order to gain the advantage from
the prevailing import tariff differential between raw materials and finished
lubricants.
LKR. Mn
Recommendation:
Quantity in Kilo Litres (KL)
Company
Chevron Ceylon Limited
Indian Oil Corporation Limited
8.40
Ceylon Petroleum Corporation
8.40
ExxonMobil Asia Pacific Pte. Ltd
6.90
Laughs Holdings Limited
4.50
Lubricant Company Sinopec
Corporation
Bharat Petroleum Corporation Limited
3.00
BP France S.A.
2.00
Shell Trading (Middle East)Private
Limited
Ashland Inc.
1.70
Toyota Tsusho Corporation
0.90
Total Lubricants India Limited
0.20
3.00
1.10
Motul France S.A.
0.0
Gulf Oil International Limited
(not renewed license for the year)
Total
0
100
Source: PUSL
Lubricant Market Sector
Percentage
(%)
70%
Automotive
Industrial
16%
Marine
6%
4%
Combined Sales in 2011
18,775
58,554
Greases
Combined Sales in 2010
14,035
54,369
Other
4%
Source: PUSL
Source: PUSL
Lubricant Sales Revenue ( LKR'000) by Company
Rs. 000
 The lubricant market had a 7% YOY growth in terms of
quantity produced from 2010 to 2011.
 For the Purpose of local blending requirements base oils
worth LKR 4,753 Mn and additives worth LKR. 1,244 Mn
were imported by LLUB and LIOC in 2011. While a total of
22,060 KL of finished lubricants and greases worth LKR.
3,708Mn were imported during the year of which 66%
were automotive lubricants.
 During 2011, 5,180 KL of lubricants were exported to
regional markets recording a 63% growth from 2010.This
sector has contributed with LKR 52 Mn to government
revenue last year, up from LKR 46 Mn in 2010.
Market
share %
56.90
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
LLUB
Lanka Indian
Ceylon
Exxon Mobil
Oil
Petroleum Asia Pacific
Corporation Corporation
Pte. Ltd
Limited
2009
2010
Laugfs
Holdings
Limited
2011
LLUB Equity Research report
2
Company Overview
LLUB
Financials
 Chevron Lubricants Lanka PLC engages in blending, manufacturing, exporting
Distributing, and marketing lubricant oils, greases, break fluids, and specialty products
in Sri Lanka. The company offers its products for industrial, commercial, and consumer
applications. Chevron Lubricants Lanka PLC markets its products under Chevron and
Caltex brands. The company was incorporated in 1992 and is based in Colombo, Sri
Lanka.
 Caltex is the 5th most powerful brand in Sri Lanka, and its brand value is amongst the
top 11 in Sri Lanka.
 LLUB has 120 Mn ordinary shares outstanding as at 10th January 2013.
 LLUB is considered a high dividend paying company However; KICL foresee a fall in the
dividend payout rate due to its movement from current blending plant in Kollonnawa
to Sapugaskanda at a cost of $ 15 Mn. This plant movement will be funded internally
through its retained profits rather than looking at external financing. However from
2014 onwards KICL have predicted that the dividend payout rate will be sustained at
90% level (85% to 90%).
Bloomberg Code
LLUB.SL
CSE Code
LLUB.N0000
Share Price
Rs. 212
Market
Capitalization
Rs. 2544 Mn
All Time High
Rs.233
All Time Low
Rs. 35
52wk range
Rs.160.00 - 231.00
Chairman
Farrukh Saeed
CEO/ MD
Kishu Gomes
Beta Values /
ASI
Beta Values/
MPI
0.43
0.28
Chevron Shareholding Structure as of
Dec 2011
49% 51%
Chevron Ceylon Limited
Public Holding
Source: LLUB Annual Report 2011
LLUB.N0000 Movement
350,000
250
300,000
200
250,000
150
150,000
100
Rs.
200,000
100,000
50
50,000
-
0
Volume
Closing Price**
Source: CSE
LLUB Lubricant Sales Volume Performance Vs. Competition
70000
A fall in volume
of 1,935 KL for
LLUB, while
Total Market
volume
increased by
4,184 KL in 2011
60000
56.90%
73.00%
Volume (KL)
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
LLUB.Cm
Share Volume
 LLUB recorded a LKR 2 Billion Profit after tax (PAT) in 2011 compared to 2010 in
which it earned a PAT of LKR1.5 Billion. It’s a 33% PAT growth, with revenue growing
at 17%.
 LLUB has further recorded a growth rate of 19.2% on its PAT, and a top line growth of
10.2% for 1-3Q 2011-2012. However, LLUB recorded a fall in top line by 2.8% QoQ for
Q3 2012. And fall in bottom line by 13.5% QoQ for Q3 2012. As highlighted by CEO
Mr. Kishu Gomes, this fall in both top line and bottom line is attributable to macro
economic conditions faced by Sri Lanka such as an increase in duty on vehicle imports
to minimise currency drain out of the country.
Export Market
 LLUB exports 5% of its lubricants mainly to Maldives and Bangladesh. LLUB has seen
a fall in growth in its Bangladesh sales whereas it has experienced the opposite in
Maldives. LLUB entered Maldives in 2003 and has been identified as a key player in
the lubricant market industry as one of the major exporters and currently enjoys a
10% market share with expectation of a 5% growth in the near future. It has also
announced its commitment to the Damas Company in Maldives by signing an
agreement spanning 5 years to distribute Chevron’s product range.
 With this new agreement Caltex will further penetrate into the Maldivian lubricant
market by focusing on marine transportation and power generation, going one step
further from supplying lubricants to the transport and fisheries sector.
 Sri Lankan economy recorded a steady export growth of 4% in the past 10 to 12
years but saw a decrease of 2% last year when compared to exports ,despite the
prevailed general economic conditions, to Maldives which has grown from10 % to
12% in its lubricant exports.
Reuters Code
50000
40000
30000
20000
10000
2009
2010
2011
0
2009
LLUB Market Share
Ceylon Petroleum Corporation Market Share
Source: PUSL
Total Lubricant Production
Ceylon Petroleum Corporation
2010
LLUB Prodcution
Exxon Mobil Asia Pacific
2011
LIOC Production
Source: PUSL
LLUB Equity Research report
3
Company Financial Performance
Total
 Top line Growth
Revenue
 LLUB has 3 main revenue generating sources: Automotive, Industrial
and Exports which contribute approximately 62%, 33%, and 5 %
respectively to the total group revenue .
 The automotive sector -The transport and communication sector of Sri
Automotive
Exports
Industrials
62%
Lanka grew by 11% in 2011 in comparison to 11.9% growth in 2010.
5%
33%
Considerable growth was posted by transport sector accounting to
1.3%. The Growth of the transport sub sector could be directly
attributable to the increase in new motor registration by 46.3% in 2011. As automotive sector is LLUB’s largest revenue
generating segment Sri Lanka’s Transport sector growth directly affects LLUB’s main stream of revenue.
6000000
A 157% increase
of new vehicle
registatrions
from 2009 to
The automotive Sector consists of the retail industry; the main
factor that influences automotive revenue is the number of
vehicle population in Sri Lanka. And KICL is expecting LKR
6865.75 Mn revenue from this sector in 2013.
16,000.00
14,000.00
5000000
3000000
2000000
Fall in new vehicle
1000000registration by 64,682
vehicles in 2009
Forecasted
10,000.00
Fall in import
duty in 2010
increased SL
vehicle
population
(+17% in 2010
8,000.00
0
Revenue Rs. Mn
Vehicle Units
12,000.00
4000000
6,000.00
4,000.00
2,000.00
0.00
2007 2008 2009 2010 2011 2012 2013 2014 2015
Vehicle Population
LLUB Sales
Source: LLUB Annual Report 2011 & KICL Research
Segementational Revenue of LLUB
16000
0.2
14000
0.15
The industrial sector will see a 10% growth considering the
current economic development of the country. Reflecting the
continued expansion of the domestic and external demand, the
industry sector recorded a 10.3 % growth in 2011, the highest
since 2002. And KICL is expecting LKR 3339.6 Mn revenue from
this sector in 2013.
The export sector consists of LLUB lubricant exports to
Maldives and Bangladesh and revenue is forecasted to grow by
25% year each from this sector. However currency volatility and
increased competition in the respective countries will play a
huge part in revenue growth from this sector. From this sector
KICL is expecting LKR 1725 Mn revenue in 2013.
0.1
8000
Percetange
10000
0.05
6000
4000
Overall Total Revenue of LLUB has increased from LKR 8,654 in
2007 to LKR 11,040 Mn in 2011 and forecasted total revenue of
LKR 11930.35 Mn in 2013. LLUB increased the prices of all ranges
of products in order to keep prices par with the increase in raw
material prices in the world market.
0
2000
0
-0.05
Industrial
Export
Automative
Revenue growth %
Source: LLUB Annual Report 2011 & KICL Research
Bangladesh (BDT) and Maladivian (MVR) against
LKR movement
0.635
0.119
0.625
0.118
MVR
0.630
BDT
Revenue Rs.Mn
12000
0.620
0.615
0.117
BDT
MVR
Source: Forex report & KICL Research
Other Factors that have contributed to the growth in LLUB
revenue are the change of product mix and product portfolio
strategy, export growth, global synergies, enhanced operational
efficiencies and the stable parity rate.
Further the growing awareness witnessed in the recent years of
vehicle emissions as a source of air pollution is driving
environment regulation, which has forced commercial fleet
across the region to modernize. This in turn has created a small
but growing demand for higher performance engine oils. This
enabled chevron to increase the revenue contribution from its
premium brands.
KICL believe that with rapid growth in sectors such as power and
energy, agriculture, fisheries, ports and infrastructure will
contribute
to
top
line
growth
of
LLUB.
LLUB Equity Research report
4
12,000
10,000
LKR Million
100.00
8,000
80.00
6,000
60.00
4,000
40.00
2,000
20.00
0
 The main driver of LLUB cost of sales are the
base oil prices, where base oil is the main
ingredient in lubricants, and has a strong
correlation with crude oil prices with a lag of a
few months.
0.00
Cost of Sales
Average Yearly Cost of Crude Oil per Barrel
Source: Oil Report& KICL Research
6000
Stable GP margin at 33.33%
5000
35.00%
30.00%
Fall in base Oil Prices
4000
LKR Million
 LLUB Cost of Sales was LKR 6,368 Mn in 2007
and increased to LKR 7,565 Mn in 2011( a
growth of 19%), with slight volatility in the
years in-between attributable to the volatility
experienced of the crude oil prices from US $
72.34 per barrel in 2007 to US$ 94.89 in 2011.
We forecast LLUB Cost of sales to further
increase to LKR 9719 Mn in 2015.
40.00%
25.00%
3000
20.00%
15.00%
2000
Percentage
 LLUB enjoys a 9% tariff benefit from blending
their products locally, an advantage they share
with their competitor Lanka IOC who currently
has an 8.4% percent market share of the Sri
Lankan Lubricant Market.
120.00
FORECASTED
US $ Per Barrell
Bottom Line Growth
10.00%
1000
5.00%
0
0.00%
2007 2008 2009 2010 2011 2012(E) 2013(E) 2014(E) 2015(E)
 Gross profit margins could come under
pressure if base oil prices rise which could
Gross Profit
Gross profit margins on revenue
lower LLUB’s gross profit margin in the future.
Source: LLUB Annual Report 2011 & KICL Research
However base oil prices and crude oil prices have a strong correlation, with a lag of only a few months. Chevron’s global
sourcing capabilities give rise to LLUB to benefit from pricing opportunities that arise as a result of this lag.
 However according to KICL forecast we believe that Crude oil prices will be stable around US $ 90 levels from 2013 to
2015, which will stabilise LLUB’s gross profit margins at 33.33% during the period from 2013 to 2015. Since any changes
in crude oil prices that affect LLUB cost of sales will be partially passed on as price increases to its customers.
 LLUB recorded a Gross profit of LKR 3,475 Mn in 2011 an increase of 14% compared to LKR 3,045 Mn recorded in
2010.However gross profit margin has fallen from 32.15% in 2010 to 31.48% in 2011,an approximate fall of 4.14% fall in
gross profit margin when compared with 2009. This is mainly due to the rise in crude oil prices from US $ 61.95 in 2009
to US $ 94.89 in 2011.
6000
0.3
 The company has managed ito
maintain its SG&A at low levels,
resulting in its EBIT margins remaining
healthy.
0.25
5000
19.98%
0.2
15.44%
0.15
4000
LKR MN
 With regard to LLUB Earnings before
interest and taxation (EBIT), the
company has done well to manage its
EBIT margins despite the increase in its
distribution networks. The company
recorded an EBIT margin of 24.68% in
2011 compared to 23.94% in 2010.
5.90% 0.1
4.31%
3000
-3.60%
-8.58%
2000
1000
6.02%
5.86%
0.05
0
-0.05
-0.1
-0.15
0
2007
2008
2009
2010
2011 2012(E) 2013(E) 2014(E) 2015(E)
Operating Profit(EBIT)
Distribution and Administration Cost Growth YoY %
Gross Profit
EBIT Margins
Source: LLUB Annual Report 2011 & KICL Research
LLUB Equity Research report
5
 Overall EBIT grew by 24.68% YoY to LKR 2,725 Mn in 2011. KICL forecast an EBIT of LKR 3,830 Mn in 2015. KICL further
foresee an EBIT margin of 26.27% in 2015.Positive Volume growth
33%
35%
coupled with price increases are expected to drive EBIT margins.
 LLUB’s healthy cash position paid off with a finance income of LKR
52.5Mn in 2007 to a high of LKR 99 Mn in 2009 and thereby a
sudden fall to LKR 43 Mn in 2011, attributable to a fall in interest
income from LKR 79 Mn in 2010 to LKR 35 Mn in 2011.
 The company achieved a net profit of LKR 2,001 Mn in 2011, which
was the highest net profit recorded during LLUB’s presence in the SL
lubricant market. This is partially attributable to the reduction in the
corporate tax from 35% in 2010 to 28% in 2011.
30%
26%
25%
20%
20%
12%
15%
10%
5%
0%
2007
 In line with our forecasts we foresee net profits of LLUB to increase
to LKR 2,408Mn in 2012, LKR 2,553Mn in 2013, LKR 2, 703Mn in
2014 and LKR 2,862 Mn in 2015.
2015 (E)
Gross profit margins on revenue
Net Profit Margins
Source: LLUB Annual Report 2011 & KICL Research
 LLUB net profit margins increased from 12.46 % in 2007 to 18.13% in 2011. We foresee net profit margins of LLUB to be
stable around the level of 19% for the year 2012 and going into 2015.
Fall in Dividend payment and rise in Retention rate due
to the movement of the Lubricant Blending Plant.
70.00
60.00
100%
50.00
80%
40.00
Rs.
Rs. Mn
120%
60%
30.00
40%
20.00
20%
10.00
0%
0.00
1
2
3
4
Retention ration
5
6
7
8
Dividend payout
9
EPS
Source: LLUB Annual Report 2011 & KICL Research
2007
(LKR ' Mn)
Fall in dividend payout rate
2008
2009
2010
(LKR ' Mn)
(LKR ' Mn)
(LKR ' Mn)
(LKR ' Mn)
DPS
2011 2012(E)
Book value per share
2013(E)
2014(E)
2015(E)
(LKR ' Mn)
(LKR ' Mn)
(LKR ' Mn)
(LKR ' Mn)
Turnover
Rs.
8654.30
8900.30
8691.00
9,471.00
11,040.00
12265.96
13,004.09
13,765.85
14,578.06
Net Profit
Rs.
1078.30
948.00
1495.00
1501.00
2001.61
2408.49
2553.42
2703.00
2862.48
YoY
%
-
-12.08%
57.70%
0.40%
34.25%
19.52%
6.02%
5.86%
5.90%
EPS
Rs.
YoY
%
PER – at LKR 212 /=
(X)
PEG
(X)
DPS
Dividend yield at LKR
212/=
ROE
Rs.
%
Book value per share
Rs.
PBV
(X)
8.99
7.9
12.46
12.51
16.79
20.07
21.28
22.53
23.85
-
-12.08%
57.70%
0.40%
34.25%
19.52%
6.02%
5.86%
5.90%
26.84
12.46
16.95
12.71
10.56
9.96
9.41
8.89
-2.22
0.22
42.23
0.38
0.52
1.66
1.61
1.51
6.25
5.25
12.00
12.25
9.00
10.04
18.09
20.27
21.47
33.92
40.38
17.67
17.31
23.56
21.13
11.72
10.46
9.87
0.00
0.44
0.68
0.67
0.63
0.55
0.54
0.54
0.54
15.28
17.93
18.39
18.65
26.32
36.36
39.55
41.80
44.19
8.05
5.83
5.36
5.07
4.80
%
Profitability ratios
Gross Margin
%
26.41%
23.53%
35.62%
32.15%
31.48%
33.33%
33.33%
33.33%
33.33%
EBIT Margins
%
18.55%
15.56%
25.83%
23.94%
24.81%
26.27%
26.27%
26.27%
26.27%
EBT Margins
%
Net Profit Margins
%
19.16%
12.46%
16.66%
10.65%
26.97%
17.20%
24.64%
15.85%
25.20%
18.25%
27.27%
19.64%
27.27%
19.64%
27.27%
19.64%
27.27%
19.64%
Source: LLUB Annual Report 2011 & KICL Research
LLUB Equity Research report
6
Chevron Lubricants Lanka Financial Performance for the Year 2012 Quarter 1 – Quarter 3.
LLUB Quarterly Financial Performance 2012
3QFY12
Revenue
Cost of Sales
Gross profit
- Distribution costs
- Administrative expenses
Other income
Operating profit
Finance income
Finance costs
Profit before Income tax
Income tax expense
Profit for the period
Total comprehensive income for the period
Basic earnings per share
2,995,884.00
-2,066,055.00
929,829.00
-129,225.00
-127,625.00
2,528.00
675,508.00
46,647.00
-230.00
721,925.00
-199,938.00
521,987.00
521,987.00
4.35
3QFY11
Change %
3,084,346.00
-2,066,357.00
1,017,989.00
-100,798.00
-97,600.00
104.00
819,695.00
15,547.00
-291.00
834,951.00
-231,509.00
603,442.00
603,442.00
5.03
1-3QFY12
-2.87
-0.01
-8.66
28.20
30.76
2,330.77
-17.59
200.04
-20.96
-13.54
-13.64
-13.50
-13.50
-13.52
1-3QFY11
8,892,260.00
-5,982,627.00
2,909,633.00
-302,706.00
-357,415.00
6,676.00
2,256,188.00
134,360.00
-17,261.00
2,373,287.00
-657,025.00
1,716,262.00
1,716,262.00
14.30
Change %
8,065,848.00
-5,500,742.00
2,565,106.00
-305,216.00
-292,858.00
12,837.00
1,979,869.00
22,595.00
-11,004.00
1,991,460.00
-552,283.00
1,439,177.00
1,439,177.00
11.99
10.25
8.76
13.43
-0.82
22.04
-47.99
13.96
494.64
56.86
19.17
18.97
19.25
19.25
19.27
Source: LLUB Quarterly Report 2012 & KICL Research
Top line reduced by 2.87 %
 Vehicle purchases are comparatively lower than other economies
due to high taxation policies introduced by the government.
Limited access to fuel station has also had an impact on revenue.
This has directly affected their top line. However we foresee that
LLUB will increase its revenue stream in the last quarter in 2012
due to increase in tourism and also seasonal effects where people
tend to travel more during the last quarter of the year which will
have a positive impact on the top line.
Revenue Performance
Millions
 LLUB revenue fell by 2.87% from 3QFY11 (LKR.3, 184 Mn) to
3QFY12 (LKR 2, 995 Mn). The reduction in the top line was
primarily due to high competition faced in the lubricant market as
well as due to macro economic factors that affected the market.
10.00
9.00
8.00
7.00
Sharp duty increases
on vehicles, and price
increases to recover
cost escalations
6.00
5.00
4.00
-2.87% QoQ
3.00
2.00
1.00
0.00
3QFY11 3QFY12
Gross profit reduced by 8.66% due to high cost of sales
10.25% QoQ
1-3QFY11 1-3QFY12
Source: LLUB Quarter 3 report & KICL Research
 Even though LLUB’s top line has decreased by 2.87% the cost of sales remain at almost same levels (Q32012).LLUB was
unable to reduce their heavy cost of sales due to high fixed cost and running cost in order to maintain their blending plant
situated at Kolonnawa (Which is producing 50000 MT capacity).Further LLUB has increased inventory by 20% (as at Sep
30th 2012) compared to last year. This is a clear indicator that their stocks are not moving as swiftly as during periods
when they were operating as a monopoly.
 Due to high cost of sales LLUB was unable to maintain profit margins. By looking at past trends LLUB has always been
able to pass on the increase in cost of the inputs to their customers in terms of higher prices. But in 3QFY2012 LLUB
might have not been able to pass these above mentioned costs due to high competition in the Sri Lankan market which
created high amount of stagnant inventory.
LLUB Equity Research report
7
High Distribution and Administrative expenses
 LLUB was unable to reduce the cost structure along with drop in revenue due to high cost of sales. The operational cost is
high due to higher volume handling cost as well as high distribution cost which were unable to pass on to the customers
which resulted in low revenue in 3QFY2012.
 Despite the economic situation in the
country LLUB was unable to increase
operating profit margins in 3QFY2012
compared to 3QFY2011 period. But
considering the 1-3QFY2012 LLUB has
managed to increase profit margins by
13.96%.Contribution from the 3QFY2012 to
the 2012 operating margin accounted only
for 30% compared to 41% contribution in the
previous year during the same quarter. This
clearly indicates that LLUB has a challenge in
retaining their customers and to maintain
market share.
Millions
Operating Profit has reduced by 17.6%
compared to 2.87% reduction in revenue.
6.00
-19%
5.00
-2%
4.00
-19%
5%
3.00
-23%
2.00
17%
1.00
-
Q1 2012
Revenue
Q2 2012
Gross Profit
Q3 2012
Net Profit
Source: LLUB Quarter 3 report & KICL Research
Finance income grew by 200%.
 LLUB was able to increase finance income by a considerable percentage due to upward movement of the current
interest rates in Sri Lanka during the 3rd quarter of 2012
 Considering the current movement in Sri Lanka interest rates we can expect an upward trend of the interest rates in the
short term which will have a positive impact on LLUB’s finance income.
Profit for the period and net profit
margins has reduced.
LLUB Share Price Movement : Quartely
197.00
200.00
190.00
180.00
Rs.
 Due to negative impact created in the
market share and macro economic
factors, LLUB was unable to achieve
expected profit target in 3QFY2012.
 Considering
the
cumulative
performance in 2012, LLUB has
managed to increase their net profit by
19.25% which is a positive outlook for
the company’s performance in 2012.
185.00
182.00
183.50
170.00
172.00
160.00
165.50
150.00
140.00
Q1
Q2
Highest Price 2012
Q3
Highest Pric 2011
Source: LLUB Quarter 3 report & KICL Research
LLUB Equity Research report
8
LLUB: Risk Management
Loss of market share due to the competition
 In the recent past LLUB has lost their conventional distributional channel which was refuelling stations which was one of
significant channels that gave LLUB the ability to increase their volumes. However, currently LLUB is
trying to increase their distribution network through their own automobile
service stations which will give an opportunity to other competitors to increase
Regional Outlets
Sales Outlets
their market share by looking at locations where LLUB has not entered yet such
as some parts of the North and East provinces.
 Meanwhile the local government has opened up doors to foreign and local
lubricant providers which will have a direct impact on LLUB’s market share due to
low switching costs. Customers can always switch to another lubricant product
without any cost.
Unlicensed operators
 Even though there are only 14 legal players in the market there are number of other sellers who sell lubricant products
without obtaining a license. This is a common issue faced by the industry as a whole. Still there is no effective regulatory
framework in order to stop these illegal operations.
Operational activities are outsourced
 LLUB has outsourced most of their important operational activities such as warehousing, distribution as well as drum
fabrication in order to reduce administrative hassle as well as to obtain cost effective methods from economies of scale
obtained by outsourced party. However, there is always risk element attached with outsourced activities.

Improper service by one outsourced party will have a huge impact on the whole production process which will result in a
negative impact on LLUB’s performance in the long term. Smooth production processes are always expected in order to
face the strong competition. Therefore LLUB should maintain their strong and healthy relationship with outsourced
parties and also their contingent plans should be accurate and up to date in order to facilitate any emergency.
Exchange Rate Risk
 Most of the raw materials for the production are imported and any exchange rate movements will directly impact to the
cost of production. Any depreciation of rupee would lead to increase cost of production which will ultimately result
reduction in bottom line. Therefore LLUB might require moving into hedging instrument in order to mitigate exchange
rate fluctuation risks.
LLUB Equity Research report
9
LLUB: Future Direction
 Currently LLUB owns 65% to 60% of the market share and still remains as market leader in the lubricant industry.
 There are significant opportunities in the industrial
business segment due to high expected foreign
investments as well as future industrial expansion
projects done by government.
5000000
Fall in Automotive
revenue due to loss of
marketshare
8000
7000
6000
4000000
5000
Rs. Mn
 With the expected increase in vehicle population,
potential industrial growth as well as expected
export growth, KICL assume that revenue will grow
by 7% YOY up to 2015.
6000000
Vehicle Units
 KICL assume that LLUB is focusing more on their
profit margins rather than focusing on market share
due to high competition created in the local market.
KICL believe LLUB will maintain their market
position in the near term due to high level of
satisfaction of the customers and quality of the
products.
4000
3000000
3000
2000000
2000
1000000
1000
0
0
Vehicle Population
Automotive Revenue
Source: KICL Research & ministry of Finance
 Furthermore, with the economic crisis faced in developed countries KICL expect crude oil prices to dip in the world
market which will directly impact to LLUB’s main raw material which is base oil. Due to high correlation with base oil and
crude oil KICL expect a positive impact on LLUB cost structure in the near future.
 However, KICL don’t expect any dramatic change on LLUB administrative and distribution activities in near future.
 As a good dividend payer KICL does not expect any drastic change in the dividend policy in near future. Due to the
movement of the manufacturing plant KICL expect reduction in the dividend payout ratio in order to facilitate investment
requirements. KICL expect LLUB will maintain 90% levels retention ratio after 2014.
Valuation
 KICL valuation is based on the Dividend Discount Model (DDM). We considered DDM model due to the high dividend
payout ratio of LLUB. KICL expect that LLUB will continue to maintain the current dividend payout ratio because it is a one
of the reasons why investors are attracted to this stock.
 KICL has improved our forecast for year 2012(E), revenue to be LKR 12,265 Mn and to improve further to LKR 13,004Mn
in 2013(E). KICL has anticipated that crude oil prices will remain at the same level or even dip in the world economy
resulting in a favourable outcome for the lubricant market which will ultimately impact LLUB’s bottom line.
 In our valuation model we have assumed that the company will have 5% long term growth considering LLUB retention
ratio and return on equity. We have used 12.89% as cost of equity in order to discount the dividends. We have calculated
12.89% of cost of equity considering risk free rate, beta and market risk premium.
 Risk free rate
 Beta
 Market risk premium
-10.74% (5 year Treasury bond rate)
-0.43 (based on ASPI and LLUB stock prices)
- 5%
 Based on forecasted values net profit of LKR 2408.49 Mn for FY12E amounts to a PE of 10.56 X at the current price of LKR
212.Based on 2013E and 2014E expected earning we expect a PE of 9.96X and PE 9.41 X respectively. The sector PE
stands at 10.3X.Based on sector market capitalization almost 22% of the total sector market capitalization is contributed
by LLUB which is the best contributor to the sector. This is a clear indicator that LLUB’s performance has had a direct
impact to the Manufacturing sector index performance.
 Based on KICL forecasted figures LLUB’s stock has a target value of LKR 245/=.Based on valuation KICL have concluded
that LLUB counter is undervalued. Considering the macro economic factors as well as qualitative and quantitative
factors KICL is likely to provide Long term buy recommendation.
LLUB Equity Research report
10
Annexure 01
Shareholder Information
20 Largest Shareholders as at 30th September 2012
Name of Shareholder
Number of
Shares
%
Chevron Ceylon Limited
HSBC International Nominees Ltd-BPSS Lux -Aberdeen Global Asia Smaller
Comp
HSBC International Nominees Ltd-BPSS Lux -Aberdeen Global- EME
HSBC International Nominees Ltd-BP2S London -Aberdeen Asia Smaller Comp
Caceis Bank Luxembourg S/A Barca Global Master Fund LP
Employees Provident Fund
Cargo Boat Development Company Limited
Renuka Hotels Limited
National Savings Bank
Bank of Ceylon No 1 Account
Crescent Launderers & Dry Cleaners (Pvt) Ltd
HSBC INTL NOM LTD-BP2S LUXEMBOURG-ABERDEEN GLOBAL FRONT
Danske Invest- Global emerging markets small cap
Mellon Bank N.A.- Florida Retirement system
Danske Bank A/S
DFCC Bank- Account No 1
AVIVA NDB Insurance PLC A/C No 07
Northern Trust CO S/A National Westminister Bank PLC as trustee of Jupiter
India
Mr. Udabage
Bartleet Finance Plc
61,200,000
10,629,700
51.00
8.86
4,563,700
3,580,800
3,414,600
3,310,800
2,000,000
1,400,000
1,155,135
1,144,800
1,000,000
953,597
874,000
770,000
650,000
609,400
594,800
500,000
3.80
2.98
2.85
2.76
1.67
1.17
0.96
0.95
0.83
0.79
0.73
0.64
0.54
0.51
0.50
0.42
476,500
400,000
99,227,538
0.40
0.33
82.69
Source: LLUB Annual Report 2011
DISCLAIMER: This document is a research report prepared by Kenanga Investment Corp Ltd based on the information contained in the
document the report has been compiled from sources that we believe to be reliable: however we do not hold ourselves responsible for its
completeness or accuracy. All opinions and estimates included in this report constitute of our judgment to this date and are subject to change
without notice. Information contained in this document is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell
any security or other financial instruments. Kenanga Investment Corporation Ltd, or its affiliates and/ or its directors, officers and employees
shall not be in any way be responsible or liable for loss or damage which any person or party may sustain or incur by relying on the content of
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